What changed in this filing

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Item 1A. Risk Factors

2020-12-14 compared with 2020-02-13 · 436 added, 316 removed, 183 unchanged (80% of the section changed)

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price of our common stock could, in turn, decline and you could lose all or part of your investment.

summary of our risk factors is as follows:

related to general macroeconomic and safety conditions

novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt

our business, which has and could continue to materially affect our operations, financial

condition and results of operations for an extended period of time.

we are unable to maintain compliance with certain of our debt covenants or unable

to obtain waivers, we may be unable to make additional borrowings and be declared

in default where our debt will be made immediately due and payable.

In addition, global

economic conditions may make it more difficult to access new credit facilities.

have recorded impairment charges in past periods and may record additional impairment

charges in future periods.

related to regulations and/or regulatory agencies

business operations are subject to regulatory uncertainties which may affect our ability to continue operations of existing

nightclubs, acquire additional nightclubs, or be profitable.

adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees.

or state law mandates that they be classified as employees, our business could be adversely impacted.

revenues could be significantly affected by limitations relating to permits to sell alcoholic beverages.

or conduct at our nightclubs may cause us to lose necessary business licenses, expose us to liability, or result in adverse

publicity, which may increase our costs and divert management’s attention from our business.

related to our business

may deviate from our present capital allocation strategy.

may need additional financing, or our business expansion plans may be significantly limited.

is substantial competition in the nightclub entertainment industry, which may affect

our ability to operate profitably or acquire additional clubs.

adult entertainment industry is extremely volatile.

advocacy group actions targeted at the kind of adult entertainment we offer could result

in limitations and our inability to operate in certain locations and negatively impact

our business.

rely heavily on information technology in our operations and any material failure, weakness,

interruption or breach of security could prevent us from effectively operating our business.

breaches of confidential customer information or personal employee information may adversely

affect our business.

acquisitions may result in disruptions in our business and diversion of management’s

impact of new club or restaurant openings could result in fluctuations in our financial

incur significant costs as a result of operating as a public company, and our management

devotes substantial time to new compliance initiatives.

o We have identified a material weakness in our internal control over

financial reporting.

may have uninsured risks in excess of our insurance coverage.

previous liability insurer may be unable to provide coverage to us and our subsidiaries.

protection provided by our service marks is limited.

are dependent on key personnel.

failure to maintain food safety throughout the supply chain and food-borne illness concerns

may have an adverse effect on our business.

risk factors may adversely affect our financial performance.

related to our common stock

must continue to meet NASDAQ Global Market Continued Listing Requirements, or we risk

may be subject to allegations, defamations, or other detrimental conduct by third parties,

which could harm our reputation and cause us to lose customers and/or contribute to a

deflation of our stock price.

quarterly operating results may fluctuate and could fall below the expectations of securities

analysts and investors due to seasonality and other factors, some of which are beyond

our control, resulting in a decline in our stock price.

o Anti-takeover

effects of the issuance of our preferred stock could adversely affect our common stock.

sales or the perception of future sales of a substantial amount of our common stock may

depress our stock price.

stock price has been volatile and may fluctuate in the future.

voting is not available to our stockholders.

directors and officers have limited liability and have rights to indemnification.

Details of our risk factors are as

Risks related to general macroeconomic

and safety conditions

novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt our business, which has and could continue

to materially affect our operations, financial condition and results of operations for an extended period of time.

COVID-19 pandemic has had an adverse effect that is material on our business.

The COVID-19 pandemic, federal, state and local

government responses to COVID-19, our customers’ responses to the pandemic, and our Company’s responses to the pandemic

have all disrupted and will continue to disrupt our business.

In the United States, as well as globally, individuals are being

encouraged to practice social distancing, restricted from gathering in groups and, in some areas, placed on complete restriction

from non-essential movements outside of their homes.

In response to the COVID-19 pandemic and these changing conditions, we temporarily

closed all of our clubs and restaurants on March 18, 2020.

We furloughed club and restaurant employees, except for a limited number

of unit managers, and implemented cost savings measures throughout our operations.

We have since reopened many of our club and

Bombshells locations with certain operating hour restrictions and with limited occupancy.

The COVID-19 pandemic’s impact on the economy in general could also adversely affect our customers’

financial condition, resulting in reduced spending at our clubs and restaurants.

The COVID-19 pandemic and these responses have

affected and will continue to adversely affect our customer traffic, sales and operating costs and we cannot predict how long

the pandemic will last or what other government responses may occur.

the business interruptions caused by COVID-19 last longer than we expect, we may need to seek other sources of liquidity.

COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee

that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic

club and restaurant operations could be further disrupted if any of our employees are diagnosed with COVID-19 and the circumstances

require quarantine of some or all of a club or restaurant’s employees and disinfection of the facilities.

If a significant

percentage of our workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government

restrictions in connection with COVID-19, our operations may be negatively impacted, potentially materially adversely affecting

our liquidity, financial condition or results of operations.

Those employees might seek and find other employment during our business

interruption, which could materially adversely affect our ability to properly staff and reopen our clubs and restaurants with

experienced team members when permitted to do so by governments.

suppliers could be adversely impacted by the COVID-19 pandemic.

If our suppliers’ employees are unable to work, whether

because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, we could face

shortages of food items or other supplies at our restaurants and our operations and sales could be adversely impacted by such

supply interruptions.

equity markets in the United States have been extremely volatile due to the COVID-19 pandemic and the Company’s stock price

has fluctuated significantly.

cannot predict how soon we will be able to reopen all our clubs and restaurants, as our ability to reopen our locations will depend

in part on the actions of a number of governmental bodies over which we have no control.

Moreover, once restrictions are lifted,

it is unclear how quickly customers will return to our clubs and restaurants, which may be a function of continued concerns over

safety and/or depressed consumer sentiment due to adverse economic conditions, including job losses.

Considering the significant

uncertainty as to when we can reopen some or all of our locations and the uncertain customer demand environment, in addition to

the actions described above, we have taken action to reduce our cash expenditures, which may impact our future growth, refer to

Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations discussions on Liquidity

for further information.

we are unable to maintain compliance with certain of our debt covenants or unable to obtain waivers, we may be unable to

make additional borrowings and be declared in default where our debt will be made immediately due and payable.

In addition, global

economic conditions may make it more difficult to access new credit facilities.

liquidity position is, in part, dependent upon our ability to borrow funds from financial institutions and/or private individuals.

Certain of our debts have financial covenants that require us to maintain certain operating income to debt service ratios.

of September 30, 2020, we were in compliance with all covenants or have obtained waivers.

However, as a result of the COVID-19

outbreak, our total revenues have decreased significantly, and we have implemented certain operational changes in order to address

the evolving challenges presented by the global pandemic on our operations.

Due to the impact of COVID-19, our financial performance

in future fiscal quarters will be negatively impacted.

A failure to comply with the financial covenants under our credit facility

or obtain waivers would give rise to an event of default under the terms of certain of our debts, allowing the lenders

to accelerate repayment of any outstanding debt.

We have recorded impairment charges

in past periods and may record additional impairment charges in future periods.

Our nightclubs are often acquired with a purchase

price based on historical EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

This results in certain nightclubs

carrying a substantial amount of intangible asset value, mostly allocated to licenses and goodwill.

Generally accepted accounting

principles require periodic impairment review of indefinite-lived intangible assets, long-lived assets, and goodwill to determine

if, or when events and circumstances indicate that, the fair value of these assets is not recoverable.

As a result of our

periodic impairment reviews, we recorded impairment charges of $10.6 million in 2020 (representing $7.9 million goodwill impairment

on seven club reporting units, $2.3 million of license impairment on two clubs, $302,000 property and equipment impairment on

one club and one Bombshells, and $104,000 of operating lease right-of-use asset impairment on one club);

$6.0 million in 2019

(representing $4.2 million property and equipment impairment on two clubs, $1.6 million goodwill impairment on four clubs, and

$178,000 of license impairment on one club);

and $5.6 million in 2018 (representing a $1.6 million of property and equipment impairment

on one club and one Bombshells, $834,000 goodwill impairment on two clubs, and $3.1 million of license impairment on three clubs).

A huge portion, if not all, of the impairments in 2020 relates to the current and projected decline in EBITDA caused by the COVID-19

If difficult market and economic conditions materialize over the next year and/or we experience a decrease in revenue

at one or more nightclubs or restaurants, we could incur a decline in fair value of one or more of our nightclubs or restaurants.

This could result in future impairment charges of up to the total value of our tangible and intangible assets, including goodwill.

We actively monitor our clubs and restaurants for any indication of impairment.

related to regulations and/or regulatory agencies

business operations are subject to regulatory uncertainties which may affect our ability to continue operations of existing nightclubs,

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federal licensing and other regulations will permit our nightclubs to remain in operation or profitable in the future.

We have recorded

impairment charges in past periods and may record additional impairment charges in future periods.

Our nightclubs are often

acquired with a purchase price based on historical EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

results in certain nightclubs carrying a substantial amount of intangible asset value, mostly allocated to licenses and goodwill.

Generally accepted accounting principles require an annual impairment review of these indefinite-lived intangible assets.

result of our annual impairment review, we recorded impairment charges of $6.0 million in 2019 (representing $4.2 million property

and equipment impairment on two clubs, $1.6 million goodwill impairment on four clubs, and $178,000 of license impairment on one

$5.6 million in 2018 (representing a $1.6 million of property and equipment impairment on one club and one Bombshells,

$834,000 goodwill impairment on two clubs, and $3.1 million of license impairment on three clubs);

and $7.6 million in 2017 (including

$4.7 million of goodwill impairment on three operating clubs and one property held for sale, $385,000 of property and equipment

impairment on one operating club, $1.4 million of license impairment on two clubs, and $1.2 million of other-than-temporary impairment

recognized on our cost method investment in Robust).

If difficult market and economic conditions materialize over the next year

and/or we experience a decrease in revenue at one or more nightclubs or restaurants, we could incur a decline in fair value of

one or more of our nightclubs or restaurants.

This could result in future impairment charges of up to the total value of our

intangible assets, including goodwill.

We actively monitor our clubs and restaurants for any indication of impairment.

may deviate from our present capital allocation strategy.

believe that our present capital allocation strategy will provide us with optimized returns.

However, implementation of our capital

allocation strategy depends on the interplay of several factors such as our stock price, our outstanding common shares, the interest

rates on our debt, and the rate of return on available investments.

If these factors are not conducive to implementing our present

capital allocation strategy, or we determine that adopting a different capital allocation strategy is in the best interest of

shareholders, we reserve the right to deviate from this approach.

There can be no assurance that we will not deviate from or adopt

an alternative capital allocation strategy moving forward.

may need additional financing, or our business expansion plans may be significantly limited.

cash generated from our operations is insufficient to satisfy our working capital and capital expenditure requirements, we will

need to raise additional funds through the public or private sale of our equity or debt securities.

The timing and amount of our

capital requirements will depend on a number of factors, including cash flow and cash requirements for nightclub acquisitions

and new restaurant development.

If additional funds are raised through the issuance of equity or convertible debt securities,

the ownership percentage of our then-existing shareholders will be reduced.

We cannot ensure that additional financing will be

available on terms favorable to us, if at all.

Any future equity financing, if available, may result in dilution to existing shareholders;

and debt financing, if available, may include restrictive covenants.

Any failure by us to procure timely additional financing,

if needed, will have material adverse consequences on our business operations.

is substantial competition in the nightclub entertainment industry, which may affect our ability to operate profitably or acquire

additional clubs.

nightclubs face substantial competition.

Some of our competitors may have greater financial and management resources than we do.

Additionally, the industry is subject to unpredictable competitive trends and competition for general entertainment dollars.

can be no assurance that we will be able to remain profitable in this competitive industry.

adult entertainment industry standard is to classify adult entertainers as independent contractors, not employees.

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to ensure that our adult entertainers are deemed independent contractors, if our adult entertainers are determined to have been

misclassified as independent contractors, we would incur additional exposure under federal and state law, workers’

compensation,

misclassified as independent contractors, we would incur additional exposure under federal and state law, workers’ compensation,

unemployment benefits, labor, employment and tort laws, including for prior periods, as well as potential liability for employee

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condition and our ability to conduct our business as we choose, and could damage our ability to attract and retain other personnel.

adult entertainment industry is extremely volatile.

Historically,

the adult entertainment, restaurant and bar industry has been an extremely volatile industry.

The industry tends to be extremely

sensitive to the general local economy, in that when economic conditions are prosperous, adult entertainment industry revenues

increase, and when economic conditions are unfavorable, entertainment industry revenues decline.

Coupled with this economic sensitivity

are the trendy personal preferences of the customers who frequent adult cabarets.

We continuously monitor trends in our customers’

tastes and entertainment preferences so that, if necessary, we can make appropriate changes which will allow us to remain one

of the premiere adult cabarets.

However, any significant decline in general corporate conditions or uncertainties regarding future

economic prospects that affect consumer spending could have a material adverse effect on our business.

In addition, we have historically

catered to a clientele base from the upper end of the market.

Accordingly, further reductions in the amounts of entertainment

expenses allowed as deductions from income under the Internal Revenue Code of 1954, as amended, could adversely affect sales to

customers dependent upon corporate expense accounts.

advocacy group actions targeted at the kind of adult entertainment we offer could result in limitations and our inability to operate

in certain locations and negatively impact our business.

ability to operate successfully depends on the protection provided to us under the First Amendment to the U.S.

Constitution.

time to time, private advocacy groups have sought to target our nightclubs by petitioning for non-renewal of certain of our permits

and licenses.

Furthermore, private advocacy groups which have influences on certain financial institutions have managed to sway

these financial institutions into not doing business with us.

In addition to possibly limiting our operations and financing options,

negative publicity campaigns, lawsuits and boycotts could negatively affect our businesses and cause additional financial harm

by discouraging investors from investing in our securities or requiring that we incur significant expenditures to defend our business.

revenues could be significantly affected by limitations relating to permits to sell alcoholic beverages.

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or conduct at our nightclubs may cause us to lose necessary business licenses, expose us to liability, or result in adverse publicity,

which may increase our costs and divert management’s attention from our business.

are subject to risks associated with activities or conduct at our nightclubs that are illegal or violate the terms of necessary

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Such consequences may increase our cost of

doing business, divert management’s attention from our business and make an investment in our securities unattractive to

current and potential investors, thereby lowering our profitability and our stock price.

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with local, state and federal laws.

We have a “no tolerance”

policy on illegal drug use in or around our facilities.

We have a “no tolerance” policy on illegal drug use in or around our facilities.

We continually monitor the actions of entertainers, waitresses and customers to ensure that proper behavior standards are met.

However, such policies, no matter how well designed and enforced, can provide only reasonable, not absolute, assurance that the

policies’

objectives are being achieved.

policies’ objectives are being achieved.

Because of the inherent limitations in all control systems and policies, there

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the foregoing limitations, management believes that our policies are reasonably effective in achieving their purposes.

Risks related to our business

may deviate from our present capital allocation strategy.

believe that our present capital allocation strategy will provide us with optimized returns.

However, implementation of our capital

allocation strategy depends on the interplay of several factors such as our stock price, our outstanding common shares, the interest

rates on our debt, and the rate of return on available investments.

If these factors are not conducive to implementing our present

capital allocation strategy, or we determine that adopting a different capital allocation strategy is in the best interest of

shareholders, we reserve the right to deviate from this approach.

There can be no assurance that we will not deviate from or adopt

an alternative capital allocation strategy moving forward.

may need additional financing, or our business expansion plans may be significantly limited.

cash generated from our operations is insufficient to satisfy our working capital and capital expenditure requirements, we will

need to raise additional funds through the public or private sale of our equity or debt securities.

The timing and amount of our

capital requirements will depend on a number of factors, including cash flow and cash requirements for nightclub acquisitions

and new restaurant development.

If additional funds are raised through the issuance of equity or convertible debt securities,

the ownership percentage of our then-existing shareholders will be reduced.

We cannot ensure that additional financing will be

available on terms favorable to us, if at all.

Any future equity financing, if available, may result in dilution to existing shareholders;

and debt financing, if available, may include restrictive covenants.

Any failure by us to procure timely additional financing,

if needed, will have material adverse consequences on our business operations.

is substantial competition in the nightclub entertainment industry, which may affect our ability to operate profitably or acquire

additional clubs.

nightclubs face substantial competition.

Some of our competitors may have greater financial and management resources than we do.

Additionally, the industry is subject to unpredictable competitive trends and competition for general entertainment dollars.

can be no assurance that we will be able to remain profitable in this competitive industry.

The adult entertainment industry

is extremely volatile.

Historically, the adult entertainment,

restaurant and bar industry has been an extremely volatile industry.

The industry tends to be extremely sensitive to the general

local economy, in that when economic conditions are prosperous, adult entertainment industry revenues increase, and when economic

conditions are unfavorable, entertainment industry revenues decline.

Coupled with this economic sensitivity are the trendy personal

preferences of the customers who frequent adult cabarets.

We continuously monitor trends in our customers’ tastes and entertainment

preferences so that, if necessary, we can make appropriate changes which will allow us to remain one of the premiere adult cabarets.

However, any significant decline in general corporate conditions or uncertainties regarding future economic prospects that affect

consumer spending could have a material adverse effect on our business.

In addition, we have historically catered to a clientele

base from the upper end of the market.

Accordingly, further reductions in the amounts of entertainment expenses allowed as deductions

from income under the Internal Revenue Code of 1954, as amended, could adversely affect sales to customers dependent upon corporate

expense accounts.

Private advocacy group actions targeted

at the kind of adult entertainment we offer could result in limitations and our inability to operate in certain locations and

negatively impact our business.

Our ability to operate successfully depends

on the protection provided to us under the First Amendment to the U.S.

Constitution.

From time to time, private advocacy groups

have sought to target our nightclubs by petitioning for non-renewal of certain of our permits and licenses.

Furthermore, private

advocacy groups which have influences on certain financial institutions have managed to sway these financial institutions into

not doing business with us.

In addition to possibly limiting our operations and financing options, negative publicity campaigns,

lawsuits and boycotts could negatively affect our businesses and cause additional financial harm by discouraging investors from

investing in our securities or requiring that we incur significant expenditures to defend our business.

rely heavily on information technology in our operations and any material failure, weakness, interruption or breach of security

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We may in the future become subject to lawsuits or other proceedings

for purportedly fraudulent transactions arising from the actual or alleged theft of our customers’

debit and credit card

for purportedly fraudulent transactions arising from the actual or alleged theft of our customers’ debit and credit card

information or if customer or employee information is obtained by unauthorized persons or used inappropriately.

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or proceeding, or any adverse publicity resulting from such an event, may have a material adverse effect on our business.

acquisitions may result in disruptions in our business and diversion of management’s attention.

have made and may continue to make acquisitions of complementary nightclubs, restaurants or related operations.

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of these individuals.

Such acquisitions may disrupt our operations and divert management’s attention from day-to-day operations,

which could impair our relationships with current employees, customers and partners.

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indicative of results to be expected for any other fiscal quarter or for a full fiscal year.

must continue to meet NASDAQ Global Market Continued Listing Requirements, or we risk delisting.

Our securities are currently

listed for trading on the NASDAQ Global Market.

We must continue to satisfy NASDAQ’s continued listing requirements or risk

delisting which would have an adverse effect on our business.

If our securities are ever delisted from NASDAQ, they may trade

on the over-the-counter market, which may be a less liquid market.

In such case, our shareholders’

ability to trade or obtain

quotations of the market value of shares of our common stock would be severely limited because of lower trading volumes and transaction

These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities.

Additionally,

we are presently not in compliance with NASDAQ Listing Rule 5250(c)(1), which requires timely filing of all required periodic

financial reports with the SEC.

Although we intend to regain compliance with Listing Rule 5250(c)(1) by filing all such reports

as soon as practicable, there is no assurance that we will be able to maintain compliance with Listing Rule 5250(c)(1)

or any of the other NASDAQ continued listing requirements.

may be subject to allegations, defamations, or other detrimental conduct by third parties, which could harm our reputation and

cause us to lose customers and/or contribute to a deflation of our stock price.

have been subject to allegations by third parties or purported former employees, negative internet postings, and other adverse

public exposure on our business, operations and staff compensation.

We may also become the target of defamations or other detrimental

conduct by third parties or disgruntled former or current employees.

Such conduct may include complaints, anonymous or otherwise,

to regulatory agencies, media or other organizations.

We may be subject to government or regulatory investigation or other proceedings

as a result of such third-party conduct and may be required to spend significant time and incur substantial costs to address such

third-party conduct, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable

period of time, or at all.

Any government or regulatory investigations initiated as a result of the above may cause a deflation

in our stock price.

Additionally, allegations, directly or indirectly against us, may be posted on the internet, including social

media platforms by anyone, whether or not related to us, on an anonymous basis.

Any negative publicity on us or our management

can be quickly and widely disseminated.

Social media platforms and devices immediately publish the content of their subscribers

and participants post, often without filters or checks on accuracy of the content posted.

Information posted may be inaccurate

and adverse to us, and it may harm our reputation, business or prospects.

The harm may be immediate without affording us an opportunity

for redress or correction.

Our reputation may be negatively affected as a result of the public dissemination of negative and potentially

false information about our business and operations, which in turn may cause us to lose customers.

could be subject to liability, penalties and other restrictive sanctions and adverse consequences arising out of an SEC

investigation.

are cooperating with an SEC investigation as discussed in Note 11 to our consolidated financial statements included in

this Annual Report on Form 10-K.

We cannot predict the outcome or impact of this matter, and there exists the possibility

that we could be subject to liability, penalties and other restrictive sanctions and adverse consequences if the SEC or any other

government agency were to pursue legal action in the future.

Moreover, we expect to incur costs in responding to related requests

for information and subpoenas, and if instituted, in defending against any governmental proceedings.

incur significant costs as a result of operating as a public company, and our management devotes substantial time to new compliance

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The Sarbanes-Oxley

Act of 2002 (the “Sarbanes-Oxley Act”), as well as new rules subsequently implemented by the SEC, have imposed various

requirements on public companies, including requiring certain corporate governance practices.

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and financial compliance costs and will make some activities more time-consuming and costly.

In addition, the Sarbanes-Oxley

Act requires, among other things, that we maintain effective internal control over financial reporting and effective disclosure

controls and procedures.

In particular, under Section 404 of the Sarbanes-Oxley Act, we are required to perform system and process

evaluation and testing on the effectiveness of our internal control over financial reporting, and our independent registered public

accounting firm is required to report on the effectiveness of our internal control over financial reporting.

In performing this

evaluation and testing, both our management and our independent registered public accounting firm concluded that our internal

control over financial reporting is not effective as of September 30, 2019 because of a material weakness.

however, addressing this issue and remediating our material weakness.

Upon finalizing the remediation of this

material weakness, we believe our internal control will be deemed effective.

Correcting this issue, and thereafter our continued

compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts.

Moreover, if we are not able to correct our internal control issues and comply with the requirements of Section 404 in a timely

manner, or if in the future we or our independent registered public accounting firm identifies deficiencies in our internal controls

over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline, and we could

be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial

and management resources.

have identified a material weakness in our internal control over financial reporting

Management, including

our Chief Executive Officer and our Chief Financial Officer, assessed the effectiveness of our internal control over financial

reporting as of September 30, 2019 and concluded that we did not maintain effective internal control over financial reporting.

Specifically, management identified a material weakness over financial statement close and reporting—see

Item 9A, “Controls and Procedures,”

While certain actions have been taken to implement a remediation plan to

address this material weakness and to enhance our internal control over financial reporting, if this material weakness

is not remediated, it could adversely affect our ability to report our financial condition and results of operations in

a timely and accurate manner, which could negatively affect investor confidence in our company, and, as a result, the value of

our common stock could be adversely affected.

quarterly operating results may fluctuate and could fall below the expectations of securities analysts and investors due to seasonality

and other factors, some of which are beyond our control, resulting in a decline in our stock price.

nightclub operations are affected by seasonal factors.

Historically, we have experienced reduced revenues from April through September

with the strongest operating results occurring from October through March.

As a result, our quarterly and annual operating results

and comparable restaurant sales may fluctuate significantly as a result of seasonality and the factors discussed above.

results for any one fiscal quarter are not necessarily indicative of results to be expected for any other fiscal quarter or for

any fiscal year and same-store sales for any particular future period may decrease.

In the future, operating results may fall

below the expectations of securities analysts and investors.

In that event, the price of our common stock would likely decrease.

In addition, the Sarbanes-Oxley Act requires,

among other things, that we maintain effective internal control over financial reporting and effective disclosure controls and

In particular, under Section 404 of the Sarbanes-Oxley Act, we are required to perform system and process evaluation

and testing on the effectiveness of our internal control over financial reporting, and our independent registered public accounting

firm is required to report on the effectiveness of our internal control over financial reporting.

In performing this evaluation

and testing, both our management and our independent registered public accounting firm concluded that our internal control over

financial reporting is not effective as of September 30, 2020 because of a material weakness.

We are, however, addressing this

issue and remediating our material weakness.

Upon finalizing the remediation of this material weakness, we believe our internal

control will be deemed effective.

Correcting this issue, and thereafter our continued compliance with Section 404 will require

that we incur substantial accounting expense and expend significant management efforts.

Moreover, if we are not able to correct

our internal control issues and comply with the requirements of Section 404 in a timely manner, or if in the future we or our

independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are

deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to sanctions or investigations

by the SEC or other regulatory authorities, which would require additional financial and management resources.

We have identified a material weakness

in our internal control over financial reporting.

Management, including our Chief Executive

Officer and our Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of September

30, 2020 and concluded that we did not maintain effective internal control over financial reporting.

Specifically, management

identified a material weakness over the income tax provision—see Item 9A, “Controls and Procedures,”

While certain actions have been taken to implement a remediation plan to address this material weakness and to enhance

our internal control over financial reporting, if this material weakness is not remediated, it could adversely affect our ability

to report our financial condition and results of operations in a timely and accurate manner, which could negatively affect investor

confidence in our company, and, as a result, the value of our common stock could be adversely affected.

may have uninsured risks in excess of our insurance coverage.

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However, there can be no assurance that uninsured liabilities in excess of the coverage provided by insurance,

which liabilities may be imposed pursuant to the Texas “dram shop”

statute or similar “dram shop”

which liabilities may be imposed pursuant to the Texas “dram shop” statute or similar “dram shop” statutes

or common law theories of liability in other states where we operate or expand.

For example, the Texas “dram shop”

statute provides a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully

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previously reported, the Company and its subsidiaries were insured under a liability policy issued by Indemnity Insurance Corporation,

RRG (“IIC”) through October 25, 2013.

The Company and its subsidiaries changed insurance companies on that date.

November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation

Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance

Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”).

November 7, 2013, the Court of Chancery of the State of Delaware entered a Rehabilitation and Injunction Order (“Rehabilitation

Order”), which declared IIC impaired, insolvent and in an unsafe condition and placed IIC under the supervision of the Insurance

Commissioner of the State of Delaware (“Commissioner”) in her capacity as receiver (“Receiver”).

The Rehabilitation

2 unchanged sentences

Further, the order stayed or abated pending lawsuits involving IIC as the insurer until May 6, 2014.

April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation

Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by

April 10, 2014, the Court of Chancery of the State of Delaware entered a Liquidation and Injunction Order With Bar Date (“Liquidation

Order”), which ordered the liquidation of IIC and terminated all insurance policies or contracts of insurance issued by

The Liquidation Order further ordered that all claims against IIC must have been filed with the Receiver before the close

2 unchanged sentences

As a result, the Company and its subsidiaries no longer had insurance coverage under the liability policy with

The Company has retained counsel

to defend against and evaluate these claims and lawsuits.

We are funding 100% of the costs of litigation and will seek reimbursement

from the bankruptcy receiver.

The Company filed the appropriate claims against IIC with the Receiver before the January 16, 2015

deadline and has provided updates as requested;

however, there are no assurances of any recovery from these claims.

It is unknown

at this time what effect this uncertainty will have on the Company.

As previously stated, since October 25, 2013, the Company

obtained general liability coverage from other insurers, which have covered and/or will cover any claims arising from actions

after that date.

As of September 30, 2019, we have 2 remaining unresolved claims out of the original 71 claims.

The Company has retained counsel to defend against and evaluate these claims and lawsuits.

We are funding 100% of the costs

of litigation and will seek reimbursement from the bankruptcy receiver.

The Company filed the appropriate claims against IIC with

the Receiver before the January 16, 2015 deadline and has provided updates as requested;

however, there are no assurances of any

recovery from these claims.

It is unknown at this time what effect this uncertainty will have on the Company.

As previously stated,

since October 25, 2013, the Company obtained general liability coverage from other insurers, which have covered and/or will cover

any claims arising from actions after that date.

As of September 30, 2020, we have 2 remaining unresolved claims out of the

original 71 claims.

protection provided by our service marks is limited.

rights to the trade names “RCI Hospitality Holdings, Inc.,”

“Rick’s,”

“Rick’s Cabaret,”

“Tootsie’s Cabaret,”

“Club Onyx,”

“XTC Cabaret,”

“Temptations,”

“Jaguars,”

“Downtown Cabaret,”

“Cabaret East,”

Bombshells Restaurant and Bar,”

and “Vee Lounge”

are established under common law, based upon our substantial and continuous use of these trade names in interstate commerce, some

of which have been in use at least as early as 1987.

We have registered our service mark, “RICK’S AND STARS DESIGN,”

and the “BOMBSHELLS RESTAURANT & BAR”

logo design with the United States Patent and Trademark Office.

also obtained service mark registrations from the Patent and Trademark Office for “RICK’S AND STARS DESIGN”

logo, “RCI HOSPITALITY HOLDINGS, INC.,”

“RICKS,”

“RICK’S CABARET,”

“CLUB ONYX,”

“XTC CABARET,”

“SCARLETT’S CABARET,”

“SILVER CITY CABARET,”

“BOMBSHELLS RESTAURANT

AND BAR”, “THE SEVILLE CLUB”, “DOWN IN TEXAS SALOON”, “CLUB DULCE”, “THE BLACK

ORCHID”, “HOOPS CABARET”, “VEE LOUNGE,”

“STUDIO 80”, “FOXY’S CABARET,”

and “EXOTIC DANCER”

are registered through service mark registrations issued by the United States Patent and Trademark

As of this date, we have pending registration applications for the names “TOOTSIES CABARET”, “Toys for

Tatas”, “In The Biz”, “Better Flight, Better Price!”

and “Bombshells Officer’s Club”.

Our rights to the trade names “RCI Hospitality

Holdings, Inc.,” “Rick’s,” “Rick’s Cabaret,” “Tootsie’s Cabaret,”

“Club Onyx,” “XTC Cabaret,” “Temptations,” “Jaguars,” “Downtown Cabaret,”

“Cabaret East,” “Bombshells Restaurant and Bar,” and “Vee Lounge” are established under

common law, based upon our substantial and continuous use of these trade names in interstate commerce, some of which have been

in use at least as early as 1987.

We have registered our service mark, “RICK’S AND STARS DESIGN,” and the “BOMBSHELLS

RESTAURANT & BAR” logo design with the United States Patent and Trademark Office.

We have also obtained service mark

registrations from the Patent and Trademark Office for “RICK’S AND STARS DESIGN” logo, “RCI HOSPITALITY

HOLDINGS, INC.,” “RICKS,” “RICK’S CABARET,” “CLUB ONYX,” “XTC CABARET,”

“SCARLETT’S CABARET,” “SILVER CITY CABARET,” “BOMBSHELLS RESTAURANT AND BAR,”

“THE SEVILLE CLUB,” “DOWN IN TEXAS SALOON,” “CLUB DULCE,” “THE

BLACK ORCHID,” “HOOPS CABARET,” “VEE LOUNGE,” “STUDIO 80,” “FOXY’S

CABARET,” “EXOTIC DANCER,” and “TOYS FOR TATAS” are registered through service mark registrations

issued by the United States Patent and Trademark Office.

As of this date, we have pending registration applications for the names

“TOOTSIES CABARET,” “In The Biz,” and “Bombshells Officer’s Club.”

We also own the rights to numerous trade names associated with our media division.

There can be no assurance that the steps we

have taken to protect our service marks will be adequate to deter misappropriation of our protected intellectual property rights.

There can be no assurance that the steps

we have taken to protect our service marks will be adequate to deter misappropriation of our protected intellectual property rights.

Litigation may be necessary in the future to protect our rights from infringement, which may be costly and time consuming.

loss of the intellectual property rights owned or claimed by us could have a material adverse effect on our business.

Anti-takeover

effects of the issuance of our preferred stock could adversely affect our common stock.

Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock in one or more series, to fix the number

of shares constituting any such series, and to fix the rights and preferences of the shares constituting any series, without any

further vote or action by the stockholders.

The issuance of preferred stock by the Board of Directors could adversely affect the

rights of the holders of our common stock.

For example, such issuance could result in a class of securities outstanding that would

have preferences with respect to voting rights and dividends and in liquidation over the common stock, and could (upon conversion

or otherwise) enjoy all of the rights appurtenant to common stock.

The Board’s authority to issue preferred stock could

discourage potential takeover attempts and could delay or prevent a change in control of the Company through merger, tender offer,

proxy contest or otherwise by making such attempts more difficult to achieve or costlier.

There are no issued and outstanding

shares of preferred stock;

there are no agreements or understandings for the issuance of preferred stock;

and the Board of Directors

has no present intention to issue preferred stock.

sales or the perception of future sales of a substantial amount of our common stock may depress our stock price.

market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market,

or as a result of the perception that these sales could occur.

In addition, these factors could make it more difficult for us

to raise funds through future offerings of common stock.

stock price has been volatile and may fluctuate in the future.

trading price of our securities may fluctuate significantly.

This price may be influenced by many factors, including:

performance and prospects;

depth and liquidity of the market for our securities;

perception of us and the industry in which we operate;

in earnings estimates or buy/sell recommendations by analysts;

financial and other market conditions;

economic conditions.

stock markets have experienced, and may experience, extreme price and trading volume volatility.

These broad market fluctuations

may adversely affect the market price of our securities.

are dependent on key personnel.

future success is dependent, in a large part, on retaining the services of Eric Langan, our President and Chief Executive Officer.

Our future success is dependent, in a large

part, on retaining the services of Eric Langan, our President and Chief Executive Officer, and Bradley Chhay, our Chief

Financial Officer.

Langan possesses a unique and comprehensive knowledge of our industry.

Langan has no present plans to leave or retire

in the near future, his loss could have a negative effect on our operating, marketing and financial performance if we are unable

to find an adequate replacement with similar knowledge and experience within our industry.

We maintain key-man life insurance

with respect to Mr.

Langan’s employment agreement recently expired.

Although we are presently in the

process of negotiating a new employment agreement with Mr.

Langan has no present

plans to leave or retire in the near future, his loss could have a negative effect on our operating, marketing and financial performance

if we are unable to find an adequate replacement with similar knowledge and experience within our industry.

Chhay possesses

thorough familiarity with our accounting system and how it affects our operations.

Chhay is also vital in our due diligence

efforts when acquiring clubs.

We maintain key-man life insurance with respect to Mr.

Langan but not for Mr.

Langan’s employment agreement recently expired.

Although we are presently in the process of negotiating a new employment

agreement with Mr.

Langan, there can be no assurance that Mr.

Langan will continue

to be employed by us.

voting is not available to our stockholders.

voting in the election of Directors is expressly denied in our Articles of Incorporation.

Accordingly, the holder or holders of

a majority of the outstanding shares of our common stock may elect all of our Directors.

directors and officers have limited liability and have rights to indemnification.

Articles of Incorporation and Bylaws provide, as permitted by governing Texas law, that our directors and officers shall not be

personally liable to us or any of our stockholders for monetary damages for breach of fiduciary duty as a director or officer,

with certain exceptions.

The Articles further provide that we will indemnify our directors and officers against expenses and liabilities

they incur to defend, settle, or satisfy any civil litigation or criminal action brought against them on account of their being

or having been its directors or officers unless, in such action, they are adjudged to have acted with gross negligence or willful

inclusion of these provisions in the Articles may have the effect of reducing the likelihood of derivative litigation against

directors and officers and may discourage or deter stockholders or management from bringing a lawsuit against directors and officers

for breach of their duty of care, even though such an action, if successful, might otherwise have benefited us and our stockholders.

Articles provide for the indemnification of our officers and directors, and the advancement to them of expenses in connection

with any proceedings and claims, to the fullest extent permitted by Texas law.

The Articles include related provisions meant to

facilitate the indemnitee’s receipt of such benefits.

These provisions cover, among other things:

(i) specification of the

method of determining entitlement to indemnification and the selection of independent counsel that will in some cases make such

determination, (ii) specification of certain time periods by which certain payments or determinations must be made and actions

must be taken, and (iii) the establishment of certain presumptions in favor of an indemnitee.

as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling

persons pursuant to the foregoing provisions, we have been advised that in the opinion of the Securities and Exchange Commission,

such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Langan will continue to be employed by us.

We have not entered

into a formal employment agreement with Mr.

Chhay since his appointment as CFO in September 2020.

failure to maintain food safety throughout the supply chain and food-borne illness concerns may have an adverse effect on our

18 unchanged sentences

acts, energy shortages and rolling blackouts, and weather (including, major hurricanes and regional snow storms) and other acts

Risk related to our common stock

We must continue to meet NASDAQ Global

Market Continued Listing Requirements, or we risk delisting.

Our securities are currently listed for trading

on the NASDAQ Global Market.

We must continue to satisfy NASDAQ’s continued listing requirements or risk delisting which

would have an adverse effect on our business.

If our securities are ever delisted from NASDAQ, they may trade on the over-the-counter

market, which may be a less liquid market.

In such case, our shareholders’ ability to trade or obtain quotations of the

market value of shares of our common stock would be severely limited because of lower trading volumes and transaction delays.

These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities.

We may be subject to allegations,

defamations, or other detrimental conduct by third parties, which could harm our reputation and cause us to lose customers and/or

contribute to a deflation of our stock price.

We have been subject to allegations by

third parties or purported former employees, negative internet postings, and other adverse public exposure on our business, operations

and staff compensation.

We may also become the target of defamations or other detrimental conduct by third parties or disgruntled

former or current employees.

Such conduct may include complaints, anonymous or otherwise, to regulatory agencies, media or other

organizations.

We may be subject to government or regulatory investigation or other proceedings as a result of such third-party

conduct and may be required to spend significant time and incur substantial costs to address such third-party conduct, and there

is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time, or at

Any government or regulatory investigations initiated as a result of the above may cause a deflation in our stock price.

Additionally, allegations, directly or indirectly against us, may be posted on the internet, including social media platforms

by anyone, whether or not related to us, on an anonymous basis.

Any negative publicity on us or our management can be quickly

and widely disseminated.

Social media platforms and devices immediately publish the content of their subscribers and participants

post, often without filters or checks on accuracy of the content posted.

Information posted may be inaccurate and adverse to us,

and it may harm our reputation, business or prospects.

The harm may be immediate without affording us an opportunity for redress

or correction.

Our reputation may be negatively affected as a result of the public dissemination of negative and potentially false

information about our business and operations, which in turn may cause us to lose customers.

Our quarterly operating results may

fluctuate and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some

of which are beyond our control, resulting in a decline in our stock price.

Our nightclub operations are affected by

seasonal factors.

Historically, we have experienced reduced revenues from April through September with the strongest operating

results occurring from October through March.

As a result, our quarterly and annual operating results and comparable restaurant

sales may fluctuate significantly as a result of seasonality and the factors discussed above.

Accordingly, results for any one

fiscal quarter are not necessarily indicative of results to be expected for any other fiscal quarter or for any fiscal year and

same-store sales for any particular future period may decrease.

In the future, operating results may fall below the expectations

of securities analysts and investors.

In that event, the price of our common stock would likely decrease.

Anti-takeover effects of the issuance

of our preferred stock could adversely affect our common stock.

Our Board of Directors has the authority

to issue up to 1,000,000 shares of preferred stock in one or more series, to fix the number of shares constituting any such series,

and to fix the rights and preferences of the shares constituting any series, without any further vote or action by the stockholders.

The issuance of preferred stock by the Board of Directors could adversely affect the rights of the holders of our common stock.

For example, such issuance could result in a class of securities outstanding that would have preferences with respect to voting

rights and dividends and in liquidation over the common stock, and could (upon conversion or otherwise) enjoy all of the rights

appurtenant to common stock.

The Board’s authority to issue preferred stock could discourage potential takeover attempts

and could delay or prevent a change in control of the Company through merger, tender offer, proxy contest or otherwise by making

such attempts more difficult to achieve or costlier.

There are no issued and outstanding shares of preferred stock;

no agreements or understandings for the issuance of preferred stock;

and the Board of Directors has no present intention to issue

preferred stock.

Future sales or the perception of

future sales of a substantial amount of our common stock may depress our stock price.

The market price of our common stock could

decline as a result of sales of substantial amounts of our common stock in the public market, or as a result of the perception

that these sales could occur.

In addition, these factors could make it more difficult for us to raise funds through future offerings

of common stock.

Our stock price has been volatile

and may fluctuate in the future.

The trading price of our securities may

fluctuate significantly.

This price may be influenced by many factors, including:

our performance and prospects;

the depth and liquidity of the market for our securities;

investor perception of us and the industry in which we operate;

changes in earnings estimates or buy/sell recommendations

general financial and other market conditions;

domestic economic conditions.

Public stock markets have experienced,

and may experience, extreme price and trading volume volatility.

These broad market fluctuations may adversely affect the market

price of our securities.

Cumulative voting is not available

to our stockholders.

Cumulative voting in the election of Directors

is expressly denied in our Articles of Incorporation.

Accordingly, the holder or holders of a majority of the outstanding shares

of our common stock may elect all of our Directors.

Our directors and officers have limited

liability and have rights to indemnification.

Our Articles of Incorporation and Bylaws

provide, as permitted by governing Texas law, that our directors and officers shall not be personally liable to us or any of our

stockholders for monetary damages for breach of fiduciary duty as a director or officer, with certain exceptions.

further provide that we will indemnify our directors and officers against expenses and liabilities they incur to defend, settle,

or satisfy any civil litigation or criminal action brought against them on account of their being or having been its directors

or officers unless, in such action, they are adjudged to have acted with gross negligence or willful misconduct.

The inclusion of these provisions in the

Articles may have the effect of reducing the likelihood of derivative litigation against directors and officers and may discourage

or deter stockholders or management from bringing a lawsuit against directors and officers for breach of their duty of care, even

though such an action, if successful, might otherwise have benefited us and our stockholders.

The Articles provide for the indemnification

of our officers and directors, and the advancement to them of expenses in connection with any proceedings and claims, to the fullest

extent permitted by Texas law.

The Articles include related provisions meant to facilitate the indemnitee’s receipt of such

These provisions cover, among other things:

(i) specification of the method of determining entitlement to indemnification

and the selection of independent counsel that will in some cases make such determination, (ii) specification of certain time periods

by which certain payments or determinations must be made and actions must be taken, and (iii) the establishment of certain presumptions

in favor of an indemnitee.

Insofar as indemnification for liabilities

arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing

provisions, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against

public policy as expressed in the Securities Act and is therefore unenforceable.

Unresolved Staff Comments.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors